Quick Facts

Portugal’s economic freedom score is 65.3, making its economy the 64th freest in the 2015 Index. Its score has improved by 1.8 points since last year, with improvements in seven of the 10 economic freedoms led by labor freedom, monetary freedom, and business freedom. Portugal is ranked 30th out of 43 countries in the Europe region, and its overall score is above the world average.

A difficult external environment and a domestic banking crisis have not prevented Portugal from advancing its economic freedom. Over the past five years, it has gained 1.3 points and moved up five spots in the rankings. Improvements in five of the 10 factors have been led by a notable easing of business and labor regulations.

Portugal still lags behind other European countries in many areas. Government spending accounts for over half of the domestic economy, and bailouts of financial firms have severely strained government finances. Rigid labor regulations prevent the market from adjusting efficiently to changes in labor demand. The rule of law is generally respected, but budgeting problems have led to backlogs in the court system.

Background

Portugal joined the European Union in 1986 and the eurozone in 2002. A sovereign debt crisis in 2011 threatened to sink the economy. Pedro Passos Coelho’s center-right Social Democrats defeated Prime Minister Jose Socrates’s Socialist Party in the 2011 general elections. In May 2011, Portugal accepted a €78 billion European Union–International Monetary Fund bailout plan that included demands for structural reforms that would reduce public debt and increase incentives for private investment. In 2014, the country’s highest court blocked the government from making the public spending cuts required to receive the last installment of the bailout. The economy is based primarily on services and industrial production. Some state enterprises have been privatized. Overall unemployment decreased from 2013 to the first quarter of 2014 but remains well above pre-crisis levels.

In 2013, the OECD expressed concern over Portugal’s reluctance to crack down on foreign bribery, particularly in regard to its former colonies Brazil, Angola, and Mozambique. Since 2001, Portugal had officially acknowledged only 15 bribery allegations, and there had been no prosecutions. The judiciary is constitutionally independent, but staff shortages and inefficiency contribute to a considerable backlog of pending trials.

Portugal’s top individual income tax rate is 48 percent, and its top corporate tax rate is 23 percent (small and medium-sized enterprises pay a lower rate). Other taxes include a value-added tax. Total tax revenue equals 32.5 percent of domestic production. Public expenditures amount to 48.7 percent of the domestic economy, and public debt is equal to about 130 percent of GDP.

Rules regarding the formation of private enterprises are now more straightforward. There is no minimum capital requirement for launching a business, which now takes less than five days and three procedures on average. Measures to reduce severance payments and revise the unemployment insurance system have been implemented. The state maintains a generous mortgage subsidy program to encourage homeownership.

EU members have a 1.0 percent average tariff rate. Although some non-tariff barriers exist, the EU is relatively open to external trade. The government screens foreign investment in several sectors. The overall financial system has endured uncertainty without significant disruption, but banking continues to be under considerable strain, highly dependent on liquidity support from the European Central Bank.